Bank of America Loses Ruling in Mortgage Fraud Fight

Bank of America Corp. lost a bid to prevent MBIA Inc. from using statistical sampling to pursue repurchase demands in a lawsuit claiming it was fraudulently induced to insure $21 billion in mortgage-backed securities.

MBIA asked New York State Supreme Court Judge Eileen Bransten to allow company lawyers to develop evidence using samples from 368,000 mortgages in 15 securitized pools to establish its fraud claims, rather than go through each loan. Proceeding loan by loan might lead to “a delay of several years before trial,” Philippe Z. Selendy, an attorney for Armonk, New York-based MBIA, said in an Oct. 13 letter to the judge.

“The court does not find any prejudice in deciding the motion before it and allowing the use of statistically significant samples of the securitizations at issue,” Bransten recently ruled. She said the defendants could also choose to use their “own sampling chosen in a statistically valid manner” to rebut MBIA’s arguments.

Bank of America said it was “too early” in the litigation to allow such sampling, according to court papers.

The “ruling is limited and procedural in nature. Nothing has been decided on the merits,” Jerry Dubrowski, a spokesman for Charlotte, North Carolina-based Bank of America, said in an e-mailed statement. “As the court notes, MBIA must prove each element of its claims — this we believe it cannot do. We intend to continue to aggressively defend.”

At Least 12 Claims

MBIA’s suit against Bank of America and its Countrywide unit is one of at least 12 claims brought by insurers in state and federal courts targeting issuers of mortgage-backed securities, including Deutsche Bank AG, Credit Suisse and GMAC Mortgage LLC. Government-owned mortgage companies Fannie Mae and Freddie Mac, and bond investors such as MetLife Inc., are also pursuing repurchase demands from originators of the securities.

Bank of America is in talks with institutional investors, including Pacific Investment Management Co. and Blackrock Inc., over repurchase demands, the bank said in a Dec. 16 statement.

A decision to allow sampling would reduce the time and cost of MBIA’s litigation and aid other insurers and investors pursuing put-back lawsuits, New York attorney David Grais said before the ruling was issued.

“We are working on strategies for trying to radically scale up put-back litigation,” said Grais, who represents two Federal Home Loan Banks and San Francisco-based Charles Schwab Corp. in similar lawsuits against Bank of America and JPMorgan Chase & Co. “The feasibility of it depends on this ruling.”

Quality of Loans

MBIA alleges that Countrywide, which Bank of America acquired in 2008, misrepresented the quality of loans in mortgage-backed securities to induce MBIA to insure against losses from defaults and foreclosures. Countrywide knowingly loaned to borrowers who couldn’t afford payments or committed fraud in their applications, according to the complaint.

Bransten in April denied Bank of America’s request to be dropped from the lawsuit. Judges in other cases against the bank followed the decision to allow Bank of America to be pursued as a defendant for Countrywide’s alleged fraud, said Grais, of the law firm Grais & Ellsworth LLP.

MBIA paid $2.2 billion in guarantees on the disputed securities and may have to pay “hundreds of millions of dollars more” to reimburse investors who were to receive money from mortgages that went into default, according to court documents.

MBIA said its reviews found that 91 percent of defaulted or delinquent loans had “material discrepancies from underwriting guidelines,” such as borrower incomes, credit scores or debt- to-income ratios. The 15 securities pools in the lawsuit consist of 368,000 home-equity lines of credit and second-lien loans that were insured and sold to investors from 2004 to 2007.

Loan-by-Loan

If forced to litigate on a loan-by-loan basis, MBIA estimated that preparing its case against Bank of America would require 24 underwriters to conduct reviews for four years, at a cost of $75 million.

“Sampling was designed to provide a scientifically valid, economical and timely alternative to just such a prohibitively wasteful exercise,” Selendy, of Quinn Emanuel Urquhart Oliver & Hedges LLP in New York, wrote in his Oct. 13 letter to the court.

So far, MBIA has filed repurchase demands for more than 14,000 loans based on individual reviews, few of which have been repaid, according to Selendy. The next court hearing in the case is scheduled for April.

‘Good Candidate’

“Sampling has been used in lots of contexts where the sheer numbers preclude prompt disposition,” said Carl Tobias, a law professor at the University of Richmond in Virginia. “This seems like a good candidate.”

Much of the evidence-gathering in the lawsuit hasn’t been conducted yet, making a decision on sampling premature, Bank of America argued in a Sept. 27 hearing before Bransten.

“There is no advantage whatsoever to this decision being made today, except to MBIA’s convenience, and except to put an arrow in their quiver,” Paul Ware Jr., Bank of America’s attorney in the lawsuit, said at the hearing. Ware declined to comment for this story.

Bank of America estimated its mortgage-repurchase claims at $12.9 billion as of Sept. 30, including $4.2 billion from insurers such as MBIA, according to a Nov. 5 quarterly filing. The bank said it reimbursed claims totaling $205 million in the quarter ended in September.

Bank of America set aside $1.9 billion in its third quarter to cover repurchase demands and expects to take “several quarters working through it,” Chief Executive Officer Brian Moynihan said in an Oct. 19 earnings call.